Chilled or Frozen? Good For Hot Summer Days But Not Your Stock!

In the heat of a long, scorching summer, thoughts naturally turn to all things chilled and frozen. From chilled watermelon to ice cream and water ice, it is an absolute delight. However, when “chilled” or “frozen” applies to a stock you hold, your summer can suddenly get a whole lot hotter.

Too many investors don’t understand the basics of “chills” and “freezes” of securities. According to the SEC, a “chill” is a “limitation of certain services available for a security on deposit at the Depository Trust Company (DTC)…a “freeze” (or global lock) is a complete restriction on all DTC services for a particular security on deposit at DTC”. So just who is the DTC and what exactly does this mean?
The DTC, or Depository Trust Company, is basically a clearinghouse created by the securities industry to expedite the sale and settlement of stock trades. They handle custody of the security and book-entry transfer services for each transaction. Every year, the DTC processes and settles transactions worth over $300 trillion for securities issued in the US and 121 countries. At any given time, the DTC holds 3.6 million securities with an approximate worth of over $35 trillion. Participants of the DTC include most brokers, dealers and banks, all of whom have their securities at the DTC. The DTC is also a member of the US Federal Reserve.

The DTC was combined with the NSCC (National Securities Clearing Corporation) to form the DTCC (Depository Trust and Clearing Corporation), which is now the world’s largest post-trade financial services company. Everything has been automated and streamlined to make the markets more efficient and secure. While the DTC is a subsidiary of the DTCC, other branches of the DTCC handle mutual funds, bonds, trusts, money markets and other financial assets well over a quadrillion dollars a year. These are astounding numbers which only serve to illustrate the power of this entity.

The DTC enacts chills or freezes on a security for a range of issues. Non-compliance with DTC rules along with legal, operational or regulatory concerns are prime examples. Some situations are resolved in very short order while others are far more serious. But while the stock is chilled or frozen, it can not only drastically affect the value of the security but how the company operates financially. If the situation or issue cannot be resolved, the security is removed from the DTC altogether, which is obviously devastating to a company.

A chill limits what services the DTC will provide. It may prevent the company from being able to add or withdraw a security from the DTC. Once the area of concern is addressed and corrected, the chill is lifted and the security may resume normal trading. However, the aftereffects of this action can be “chilling” on the company stock for quite some time depending on the nature of the infraction. You may never even find out just what the issue was since the DTC is not obligated to disclose anything if they so choose. That might change in the near future. In March of 2012, the SEC offered an opinion that some form of legal due process needs to be in place with some level of SEC involvement as well, though little has been done to move that forward yet. The goal is to provide a fair and balanced approach where a company has redress and appeal capabilities that aren’t in place at this time.

When the security is actually frozen, obviously that is worse and for reasons that warrant a more severe approach. A freeze means all services at DTC are halted completely. When the stock is frozen, the DTC notifies all parties automatically so that future trading is blocked until a determination is made and the freeze is lifted. This “participant notice” is also available publicly on DTC’s website at www.dtcc.com/legal/imp_notices. There is a lot of information there with plenty of industry terminology that might dissuade you from trying to find out about a company you are checking on, but use the search engine on the site and persist.

Next time you catch a headline about a stock you are interested in, or even own, and see either “chilled” or “frozen” next to the name, you won’t have that glazed look on your face like you have been out in the summer sun too long. You’ll know the heat has just been turned up on that stock and you could very well get burned.

What does this mean to you? As an investor, you should ask your broker about any DTC restriction history on a stock prior to buying it. If there is a history, perhaps you want to reconsider. If you are trading and investing on your own, check out www.dtcc.com and do your homework. The infraction(s) could have been minor glitches that were easily resolved, or there could have been a major issue with the company that warrants a closer look before investing in the company. Knowledge is power! no credit check small loans